Strategies to Handle Unpaid Taxes to the Canada Revenue Agency
If you find yourself in a predicament where you are unable to settle your tax dues to the Canada Revenue Agency (CRA), it’s essential to know the steps you can take to resolve this matter. Here’s a comprehensive guide on what to do if you owe back taxes to the CRA.
1. Determining Your Tax Liability to the CRA
Before you can take any action, you need to establish how much you owe the CRA. This can be done by submitting any overdue tax returns. Although this might seem intimidating, especially if you anticipate a large tax bill, it’s a necessary step. Refraining from filing your tax returns will only complicate the matter further, as the CRA will be reluctant to negotiate with you if you have outstanding tax returns.
1.1 Late Tax Filing Penalties
The deadline for submitting personal income tax returns in Canada is April 30, while those with self-employment income have until June 15. If you miss these deadlines, the CRA imposes a late filing penalty of 5% of the tax balance due, plus an additional 1% for every full month the return is delayed, up to a maximum of 12 months. This, in turn, increases your tax debt.
1.2 Notice of Assessment
After filing your tax return for each year, the CRA will issue you a Notice of Assessment. This document confirms your tax liability for the years you filed, including any penalties and interest. If you owe taxes, you will receive a letter requesting you to either make payment arrangements or contact the CRA.
1.3 Checking Your Tax Balance
To check how much you owe the CRA, it’s recommended to register for an online CRA account. This involves logging into your CRA MyAccount, selecting the Accounts and Payments tab, and clicking on Account Balance and Statement of Account. Your account balance should then be displayed.
2. Making Tax Installment Payments
Once you know how much you owe, the next step is to figure out if you can afford to repay your back taxes independently. If you can repay your total taxes within a year, the CRA will arrange a tax repayment plan. It’s crucial to be transparent about your financial situation when making this arrangement and propose a plan that you can realistically adhere to.
2.1 Negotiating Penalties and Interest
If you owe a significant amount in penalties and interest, but can afford to pay the core tax debt, you might consider seeking the help of a tax lawyer to negotiate a reduction in these additional charges. However, the CRA will not agree to a private tax settlement that does not involve full payment of the taxes due, whether the negotiation is done directly or through a tax lawyer.
2.2 Payment Methods
If the CRA requests a faster payment, you might consider taking out a loan to settle your tax debt. However, this will depend on your credit capacity and credit score. Once an agreement is reached, you can make your payments online. Ensure that all agreed-upon payments are made in full and on time.
3. Consequences of Not Paying Back Taxes
Ignoring the CRA’s collection attempts is not advisable. The CRA possesses robust collection powers under the Income Tax Act and the Excise Tax Act, which they can use to recover tax debts. These powers include issuing a CRA wage garnishment, seizing your bank funds, or placing a tax lien on your home or other real estate. They do not require a court order to execute these actions. A high tax debt can also negatively affect your credit score.
4. Options If You Can’t Afford to Pay Back Taxes
If you find yourself unable to repay your back taxes, there are two options available to you in Canada for tax debt relief. These options can only be accessed through a Licensed Insolvency Trustee (LIT). No other tax professional can assist you in avoiding the payment of taxes you legitimately owe. Only an LIT can help eliminate tax income debt or source deductions.
4.1 Filing a Consumer Proposal
A consumer proposal enables you to negotiate with the CRA to repay what you can afford. All other debts you owe will also be included in the proposal. The proposal is deemed accepted if more than half of your creditors, based on the dollar amount you owe, vote in favor of your offer. If the CRA is your largest creditor, they will need to agree with any offer you propose.
4.2 Declaring Bankruptcy
Just like any other creditor debts, tax debts can also be eliminated through bankruptcy in Canada. As soon as you file either a bankruptcy or consumer proposal, any wage garnishments stop, your accounts will be unfrozen, and the CRA can no longer place a lien on your home. However, if a lien has already been registered, a consumer proposal cannot remove the lien. Hence, it’s essential to act swiftly if you find yourself unable to repay your taxes.
5. Seeking Help from a Licensed Insolvency Trustee
If you owe a significant amount in back taxes to the CRA, you should consider reaching out to a Licensed Insolvency Trustee. An LIT can help you explore the options of a consumer proposal or bankruptcy to eliminate your tax obligations. It’s advisable to contact an LIT as early as possible to maximize the options available to you.
In conclusion, owing back taxes to the CRA can be daunting, but it’s crucial to remember that there are avenues available for you to resolve this issue. By understanding your tax liability, exploring repayment options, and seeking professional assistance, you can navigate through this financial challenge effectively.
